Competitive

Strategy
10. Mergers and Acquisitions

By John Sanders
School of Management & Languages
Heriot-Watt University
 Mergers & Acquisitions (M&A)
² Firms strive to increase their earnings over
time.
² Methods
² “Organic” approaches:
²Increase sales of existing SBUs while maintaining
operating margins
²Increase operating margins with constant sales
² Mergers and Acquisitions:
² Seek to merge or acquire another firm to
enhance their size and earnings
Operating Profit Margin is a profitability or performance ratio to calculate the % of profit a company produces from its
operations, prior to subtracting taxes and interest charges. It is calculated by dividing the operating profit by the total
revenue. The margin is also known as EBIT/EBITDA Margin; EBITDA measures the co's overall financial performance.
 Mergers & Acquisitions (M&A)
² Merger
² Two firms agree to integrate their operations on a
relatively co-equal basis joint ownership; few mergers are the joining of equals
² Acquisition friendly acquisition where an organization takes ownership of another
organisation
² One firm buys a controlling, 100 percent interest in
another firm with the intent of making the acquired
firm a subsidiary business within its portfolio.
² Takeover
² Special type of acquisition strategy wherein the target
firm did not solicit the acquiring firm's bid did not seek or ask for
formally

² Unfriendly acquisition hostile acquisition

Both acquisitions and mergers typically involve the managers of one organisation exerting strategic influence over the other
Mergers & Acquisitions (M&A)

Differentiation

Premium
Basis of
Competition
Cost
Reasons for M&A
Synergy: Whole is worth more than sum of its
parts (M&A maths is 2 + 2 = 5)

sharing capabilities

(Mercedes-Benz & Crysler)

 Reasons for M&A

Most of Pixar's most successful films were Toy Story movies

Pixar Animation Studios was acquired by Walt Disney in 2006 for $7.4 bn to restore Disney's luster (shine) as a
leader in the animated film business.
Backward Vertical Integration
Market power refers to a company's relative ability to manipulate the price of an item in
the marketplace by manipulating the level of supply or demand or both

Reasons for M&A

Example of market power would be Apple Inc. in the

² Increased market power smartphone market. Although Apple cannot completely

control the market, its iPhone product has a substantial
amount of market share and customer loyalty

² Economies of financing – larger companies can raise

money more economically
through applying for loans from banks
or issuig bonds to investors

The ability of a firm to profitably raise the market price of a good

or service above the level that would prevail under competition.
In perfectly competitive markets, market participants have no
market power.
Reasons for M&A
its all about cost effectiveness; cost advantage
² Economies of scale – lower costs by combining
operations Its all about the benefits gained by the production of large volume
of a product; cost per unit of output decreasing with increasing scale
² Using excess capacity & spreading fixed costs over
larger volumes merge;
1st Optician
services
Jan 2009 in UK
2nd Optician retail chain
in UK

D&A - Dollond & Aitchison - one of the oldest chains

of retail opticians in the UK, established in 1750
The business was absorbed into Boots Opticians in 2009
and stores were rebranded under Boots Opticians name,
completed in 2015
Reasons for M&A
Its all about cost effectiveness
² Economies of scope – can carry out more
it is linked to the benefits gained by producing
activities profitably a wide variety of products by efficiently utilizing the
same operations
² Producing similar products

Gardening retailer
Garden center
Tesco bought Dobbies in 2007 for sterling 150 mn
Tesco sold Dobbies in 2016 for sterling 217mn
Reasons for M&A
² Economies of scope – can carry out more
activities profitably
² Backward integration – buying a supplier to reduce
costs or enhance quality/differentiation
Morrisons acquired supplier of outdoor plants
supplier Lansen Nursery in Sept. 2020

Supermarket Chain
Bradford, UK

Morrisons acquired Chippindale
Foods, a leading supplier of
free-range eggs in 2018
Carrefour acquired
Bio Corn in 2008.
This acquisition enable Carrefour to accelerate the
developement of its presence in the specialised
distribution of organic products in urban centres
Reasons for M&A
² Economies of scope – can carry out more
activities profitably
² Forward integration – moving control one step closer
to customers

Car manufacturers like

BMW and Jaguar, in
recent years, are buying
their dealerships;
taking them back from the franchise
dealerships for better control and
ensure a satisfactory customer
experience; getting more involved
in the dealership network
 Reasons for M&A
² Overcoming entry barriers into:
² New product markets – product diversification
² New international markets – geographic
diversification

With Leader Price, Tesco

took over a co. with 220
Tesco boosted its presence in Poland by acquiring the retailer stores employing nearly
Leader Price for sterling 72mn from the French co. Casino. 2200 people.
Reasons for M&A
² Reshaping the firm’s competitive scope
² Can lessen a firm’s dependence on one or more products
or markets

² Learning and developing new capabilities

² When you acquire a firm you also acquire any skills and
capabilities that it has
² Firms should seek to acquire companies with different
but related and complementary capabilities in order to
build their own knowledge base
Reasons for M&A

Google M&As from 6/2010 to 10/2012

Reasons for M&A
² Cost of new product development and increased
speed to market
² Can be used to gain access to new products and to
current products that are new to the firm
² Quick approach for entering markets (product and
geographic)
Reasons for M&A
internally
² Lower risk compared to developing new products
² Easier to estimate acquisition outcomes versus internal
development problem child (question marks) products
² Internal development has a very high failure rate
² Increased diversification
² Most common mode of diversification when entering
new markets with new products
² Hard to internally develop products that differ from
current lines for markets in which a firm lacks
experience
² The more related the acquisition the higher the chances
for success related diversification
M&As And Industry Life Cycle

Introduction Growth Maturity

M&As tend to be M&As tend to be for M&As primarily for dealing

R&D and product-related acquiring products that are with over capacity in the
proven and gaining industry
acceptance
Problems in M&A Success
² Research suggests
² 20% of all mergers and acquisitions are successful
² 60% produce disappointing results
² 20% are clear failures
² Successful acquisitions generally involve
² Having a well conceived strategy for selecting the
right target firms
² Not paying too high of a price premium
² Employing an effective integration process
² Retaining target firms human capital
Problems in M&A Success
² Inability to achieve synergy especially with unrelated acquisitions

² Too much diversification

² Firms can become over diversified which can lead to a
decline in performance
² Diversified firms must process more information of
greater diversity
² Scope created by diversification may cause managers to
rely too much on financial rather than strategic controls
to evaluate performance of business units
² Acquisitions may become substitutes for innovation
Problems in M&A Success
² Too large
² Larger size may lead to more bureaucratic controls
² Bureaucratic controls
² Formalized supervisory and behavioural rules and policies designed to
ensure consistency of decisions and actions across different units of a
firm – formalized controls decrease flexibility
² Formalized controls often lead to relatively rigid and
standardized managerial behaviour
² Additional costs may exceed the benefits of the
economies of scale and additional market power
² Firm may produce less innovation
 Other Diversification Options
² Strategic alliance (or teaming agreement): parties
work together on a single project for a finite
period of time A strategic alliance between 2 or more entities
enhances the businesses of each other
² Do not exchange equity
² Do not create permanent entity to mark relationship
² Written memorandum of understanding (MOU): Sets
forth how parties plan to work together
American bookseller
The deal between Starbucks and Barnes&Noble is a clasiic
BMW group and Jaguar Land Rover example of a strategic alliance. B&N stocks the books.
joined forces to develop next generation Both cos. do what they do do best while sharing the costs
electric drive units in a move that supports of space to the benefit of both cos.
the advancement of electrification
technologies necessary to transition to Uber & Spotify.... strategic alliance based on building
an ACES (Autonomous, Connected, strengths - Spotify influenced millions of its users to choose
Uber as their preferred mode of transportation whereas
Electric and Shared vehicles) future. Uber added value to Spotify customers by giving them a
personalised experience
 Other Diversification Options
² Joint venture: parties work together for lengthy or
undefined; not known
indeterminate period of time
² Form new, third entity
² Divide ownership and control of new entity, determine who
will contribute what resources
² Advantage: two entities can remain focused on their core
businesses while letting joint venture pursue the new
opportunity
² Downside: governance issues and economic fairness issues
create friction and eventual disbandment break up
Caradigm - a 50-50 joint venture created betweem Construction - Complex projects such as Burj Khalifa in
GE, through its healthcare IT business, and Dubai; Samsung-Besix-Arabtec JV - 2004
Microsoft Corp. - 2012 Split between the 3 entities in terms of combining
Aim is to help heatcare organizations and resources and emplyees as well as share profits and
professionals use real-time, system-wide intelligence losses according to their % of interest in the venture.
to improve healthcare quality and the patient Obstacles members may face are related to structuring
experience. the management of project.
 Summary
² Popular strategy amongst large multinational firms as a
means of growth
² Should be used to increase firm value and lead to
strategic competitiveness and above average returns
² The reality is that returns are typically close to zero for
acquiring firm it issues cash or securities
in pre-negotiations stage, acquirers often pay too much due to a flawed
² Over-optimistic evaluation process; having a defect or imperfection; high expectation of more
revenue, profit, etc...
² Failure of integration management
Daimler Mercedes-Benz & USA Crysler - $36 billion merger 1995 - 2007, DaimlerChrysler; after Chrysler
posted a loss of $1.5 billion in 2006, Daimler cut it loose by selling Chrysler to the American private equity
firm Cerberus Capital Management in 2007.
Intention of the merger was to safeguard the lon-term competitiveness of the cos. involved.

Paper 2005 - Acquiring-firm shareholders lost 12% per dollar spent on acquisitions for a tolal loss of $240 billion from
1998 to 2001. This is so large because of small number of acquisitions with -ve synergy gains by firms with high
valuations.